Buying a house is a huge investment. Obviously. It’s the biggest purchase most people ever make. Selecting a loan that fits your life is every bit as important as choosing the right home to buy.
The most common loan type is called a fixed-rate mortgage, and it means just that — your interest rate remains the same throughout the life of your loan. This makes budgeting easier because your monthly principal and interest stay the same. (It’s possible your monthly payment could change if your insurance or property taxes change.)
The two most common fixed-rate mortgages are 15-year and 30-year mortgages.
The 15-year Fixed-Rate Mortgage
With a 15-year fixed-rate mortgage, your interest rate will be lower than on a longer-term loan, and you’ll pay less total interest over the life of the loan. More importantly, you’ll build equity and pay off the loan way faster.
The 30-year Fixed-Rate Mortgage
These are the most common loan types because, when compared to a shorter term (like a 15-year mortgage), they allow you to have a lower monthly payment on the same loan amount. You’ll be able to afford more house, as the saying goes.
Fixed vs. Adjustable: Which Is Right for You?
Which is better for you: A fixed-rate mortgage (also called a conventional mortgage) or an adjustable-rate mortgage (also called an ARM)? It really depends on your long-term goals. In short, a fixed-rate mortgage may be better if you intend to own the house for an extended period of time. Because your monthly payment will be lower, you’ll be able to afford more house.
An adjustable-rate mortgage begins with a fixed-interest rate, which is typically lower than the interest rate on a fixed-rate mortgage. That means your payments will be lower at first. After the initial period (usually five or seven years), your mortgage will convert to an adjustable rate that can go up depending on the corresponding financial index.
An adjustable-rate mortgage might be better for you if you plan to move in the near future or you plan to trade up in a few years. It’s not uncommon for people to begin with an adjustable-rate mortgage and then refinance to a conventional mortgage before the initial fixed-rate period ends.